The government of B.C. just tabled another balanced budget. Finance Minister Mike de Jong’s latest budget projects a surplus of $284 million for 2015-2016. 🙂 This means B.C.’s $63 billion public debt is slowly being paid down. B.C. may be the only province in Canada to avoid falling into deficit amid plunging oil prices. But there’s something else that the finance minister didn’t tell us. How did this surplus happen exactly?
In order for any government to have a surplus it must take in more money than it spends. Government revenue comes mostly from tax payers. In the past I have blogged about how money in the economy is generally created by people borrowing from private banks. So I believe a major reason the B.C. government is able to balance its books is because consumers in B.C. are going further into debt. We’re essentially shifting the debt burden from the government to the private sector.
Last year the credit bureau TransUnion said Canadian’s average non-mortgage debt is $27,131. But in B.C., it increased nearly 3% annually and totalled $38,672. That means the amount we carry on credit cards, bank loans, lines of credits and car loans is 43% higher than our fellow Canadians. And lets not forget about mortgage debt. Bucking the trend, Vancouver home sales are still growing. According the Teranet house price index, on an annual basis home prices are up 5.1% in Vancouver. More expensive real estate leads to bigger mortgages, which means higher indebtedness for home buyers. It appears people in B.C. have a tendency to pile on record amounts of personal debts. Haha, I’m glad it’s not just me. 😀
When real estate changes ownership property transfer tax gets paid. When people buy liquor excise tax is paid. By borrowing and spending more we increase the velocity of money in the economy which generates higher tax revenues for the government. 🙂 But why listen to me? I’m just an amateur blogger with no financial credentials. 😛 So here’s how Richard Werner explains it. He’s the founding director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton.
“Draw yourself a rectangle and cut it in two. One half is the government and the other half is the private sector. Let’s say you want the government to run a surplus. That means you want the government part of the rectangle to take more money out of the private sector half than it puts back in, which means there is a flow of money going from the private sector to the public sector. How can the private sector do this? You have to divide the private sector into 2 smaller rectangles, one for the private banks and the other is the non-bank public. So for the private non-bank public to pay that money to the government they have to borrow from the private banks and increase their indebtedness.” (source)
So if someone gives you grief for carrying debt just tell them you’re actually performing a public service because your debt is helping to create a balanced budget for the government so the next generation don’t have to be burdened with all that public debt. 🙂
But here’s something to think about. Is it better to allow governments to run deficits (eg: stimulus packages) so that consumers can pay down their personal debts easier, or is paying down public debt more important even at the expense of increasing private debt? 😕
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Random Useless Fact:
You have to look at this on a macro economics level. People from other provinces, and other countries can own B.C. debt. Likewise, BC residents, businesses, and governments can borrow from non-residents.
I agree with the idea that borrowing and saving has a free market balance. I disagree that B.C.’s surplus is due to residents borrowing more money. I don’t think correlation is causation in this scenario.
It’s no secret; hot economies attract investment, debt, immigrants, etc. Just look at Saskatchewan the last 10 years.
What I like about finance is it’s never really about just one thing. We have to look at things on a macro level and consider other variables to arrive to any conclusions. 🙂 Saskatchewan in the last 10 years has grown by a lot partially thanks to investment from outside the province.
It’s interesting that someone in B.C. like myself can borrow over $250K to buy properties in SK. The cost of carrying that debt obviously falls to me. But the seller around Regina whom I bought the farm from made a tidy profit, paid some taxes, and can spend whatever is left. So by going further into debt I feel like I’m part of something greater, like I’m injecting capital into Saskatchewan to help make that province more prosperous for its people.
I could have created more economic activity in SK over a year ago when I offered to send you a movie ticket for winning my giveaway, but you charitably insisted that I pass it on to someone else who needs it more. 🙂
I went to visit Canada a few years back, it’s people, it’s buildings, everything look exactly like America. Canada and US have the same problem, our economy is consumer driven, not export or manufacturing driven. In WW2 america was sitting on the side line, selling guns and bullets to both sides. America was producing and exporting. When WW2 end, economy continue to bloom. Minus the Vietnam war, forward to the 1st and 2nd Iraq war, we have become relying on China for the manufacturing. Our stores including food item (salmon, and meat) are importing from china or Chinese own company. Everything is from china. Your apple iphone to samsung phones, tv, even GE fridge, coach bags. Our GDP is consumer base. When you only consume,,at some point you got to make. And making money to pay for all that consumption is not the solution. We need to find way to get back to 50/50 at least.
Yes, we are leaning too far towards consumptions and not relying enough on production to grow the economy. And both Canada and the U.S. should work towards increasing exports. 🙂 The lower Canadian currency might add a boost to the manufacturing sector up here but we’ll have to see. The economy has gone through some major changes in the past several decades. I wonder what it will look like when the millennial generation begins to retire.
I think the older baby boomers have money, and continue to have money, the generation X are the “bad sheeps”, unless they are the PFer who are exceptional, many don’t save enough. They will drain the social security dry. The millennial came out to the workforce with the depression. The mind set is to save (many wouldn’t go buy house). The millennial will not have SS, they work to pay for the X’er, and the government may raise SS retirement age to 90. hahah
Liquid,
I’ll chime in with a European perspective. As you probably know most Western European countries have tons of public sector debt, but hardly any private/household debt. While there’s not direct link between public and private debt, it’s pretty obvious that governments taking on debt to improve the country’s macro-economical sitation reduces the necessity for households to take on debt themselves. This the logic behind the public budgettary deficit in Belgium.
Personally, I prefer public debt to private debt as developed countries have a much higher chance to bounce back from years of taking on debt, while individuals will have a much tougher time. Furthermore, I believe that desirable from a societal standpoint in that it’s a sort of protection for people against themselves: if there’s no need to take on debt for an individual, the chance of them misusing debt is much smaller.
Just my two cents!
Cheers,
NMW
Thanks for your two Euro cents, NMW. 🙂 People do need to be protected and often that’s what they elect government to do. At one point in time Canadian on average saved 20% of annual income, but that was in the 80s when inflation was pretty high.